Learning, Internal rationality, Consumption based asset pricing
Abstract:
We present a decision theoretic framework in which agents are learning about market behavior and that
provides microfoundations for models of adaptive learning. Agents are ‘internally rational’, i.e., maximize
discounted expected utility under uncertainty given dynamically consistent subjective beliefs about the
future, but agents may not be ‘externally rational’, i.e., may not know the true stochastic process for payoff
relevant variables beyond their control. This includes future market outcomes and fundamentals. We apply
this approach to a simple asset pricing model and show that the equilibrium stock price is then determined
by investors’ expectations of the price and dividend in the next period, rather than by expectations of the
discounted sum of dividends. As a result, learning about price behavior affects market outcomes, while
learning about the discounted sum of dividends is irrelevant for equilibrium prices. Stock prices equal the
discounted sum of dividends only after making very strong assumptions about agents’ market knowledge.
Dieser Eintrag ist Teil der Universitätsbibliographie.
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